Health Benefit Costs Could Jump in 2014

Health care reform's impact on enrollment is wild card that could boost spending

By Stephen Miller, CEBS
11/25/2013

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Employers expect that their health coverage cost per employee will rebound in 2014 by an average of 8 percent if they make no changes to their current plans; the small group market could be hit even harder.

The good news is that slower cost growth continued in 2013 as employers took action in anticipation of new cost pressures that will arise over the next few years from health care reform. According to the National Survey of Employer-Sponsored Health Plans, conducted annually by Mercer, growth in the average total health benefit cost per employee slowed from 4.1 percent in 2012 to just 2.1 percent in 2013.

Costs averaged $10,779 per employee in 2013; this includes employer and employee contributions for medical, dental and other health coverage.

But employers expect that the growth rate in the per-employee cost of coverage will rebound in 2014 to 5.2 percent overall, which reflects changes they will make to reduce costs; if they made no changes to their current plans, they estimate that costs would rise by an average of 8 percent (Fig. 1).

The survey included public and private organizations in the U.S. with 10 or more employees; 2,842 organizations responded during the late summer of 2013, when most employers have a good fix on their costs for the current year.

Small Versus Large Employers

While cost growth has slowed among organizations of all sizes, it was lowest for small employers in 2013. Among those with 10-499 employees, average cost rose by only about 1 percent, while among very large organizations (those with 5,000 or more employees) it rose 3.7 percent (Fig. 2).

However, many plans in the small-group market, generally with fewer than 50 employees, have reported substantially higher rates for 2014 as they face the same essential benefit mandates and age-rating changes as individual market plans (see box at the end of this article).

Many employers expect to spend more to cover more workers in 2014. The Affordable Care Act (ACA) mandate requiring all individuals to obtain coverage or face a tax penalty goes into effect in 2014.

“The good news is that employers have already taken decisive action to slow cost growth so they will be in a better position to handle the challenges ahead,” said Julio A. Portalatin, president and CEO of Mercer. “But the impact of the ACA on enrollment levels remains a huge question mark.”

Currently, 22 percent of an organization’s eligible employees, on average, waive coverage for themselves either because they are covered under another plan or because they choose to go without it. Among employees who do enroll, an average of 53 percent select dependent coverage. But in 2014, because of the individual mandate, it is likely that fewer people will waive coverage for themselves and more will choose dependent coverage—although the extent of the change is difficult to predict.

Some large employers say they will take steps to control growth in enrollment, most commonly by increasing the employee contribution for dependent coverage (18 percent) or employee-only coverage (10 percent). Some already impose a surcharge on premium contributions for spouses who have other coverage available (9 percent of large employers) or even make them ineligible for coverage (7 percent of large employers); it seems likely that these provisions will become more common next year (Fig. 4).

“A big question is how many employees will enroll for the first time, given that the tax penalty for not obtaining coverage is relatively small,” said Tracy Watts, Mercer’s national leader for health reform. “But an employer might wind up covering more dependents if others in the area have made changes to discourage their employees from enrolling dependents.”

The majority of large organizations believe that higher enrollments and new fees will boost their benefit spending in 2014. The median increase predicted is 3.5 percent, although some employers (13 percent) expect their spending on health benefits to rise by more than 10 percent (Fig. 5).

“Cost increases from higher enrollment would be on top of the normal increase in the per-employee cost of coverage,” explained Watts.

Enrollment in CDHPs

Nationally, enrollment in consumer-directed health plans (CDHPs) rose from 16 percent of covered employees in 2012 to 18 percent in 2013 (Fig. 6). This is the same portion that enrolled in health maintenance organizations (HMOs). In the Midwest, CDHP enrollment is now nearly triple that of HMOs (27 percent compared with 10 percent).

CDHPs are an important option for employers looking for a low-cost plan to make extending coverage to additional employees more affordable. The average cost of coverage in a CDHP paired with a tax-advantaged health savings account (HSA) is 17 percent less than coverage in a PPO and 20 percent less than in an HMO: $8,482 per employee, compared with $10,196 for PPOs and $10,612 for HMOs (Fig. 7).

2018 Excise Tax

CDHPs will also be a key strategy for employers that need to find a way to lower costs in 2018, when they will be required to pay a 40 percent excise tax on health coverage that costs more than $10,200 for an individual or $27,500 for a family. Mercer estimates that about a third of employers are currently at risk for triggering the excise tax in 2018 if they make no changes to their most costly plan. Nearly two-thirds of all large employers and about one-third of small employers say they expect to offer a CDHP within three years (Fig. 8).

Wellness Promotion

Workforce health management or wellness initiatives are one of employers’ top strategies for controlling spending on health care. While most organizations believe that health management programs are making a difference, proving return on investment (ROI) remains a challenge for many. The largest employers are the most likely to have formally measured the ROI of their health management programs (46 percent of employers with 20,000 or more workers). Nearly nine out of 10 of these employers say their programs have had a positive effect on slowing medical-benefit cost increases.

Perhaps because they are seeing results, employers are increasingly willing to invest in the success of these programs. More than half of large organizations with health management programs now use financial incentives to encourage higher participation: 52 percent, up from 48 percent in 2012 and 33 percent in 2011 (Fig. 9).

These incentives are often substantial. Among employers that offer lower premium contributions to employees who complete a health assessment, the median reduction in the annual contribution required for employee-only coverage is $250. In addition, a growing number of employers are providing incentives for achieving desired outcomes, instead of (or in addition to) incentives for participating in programs. In 2013, 20 percent of large employers are using outcomes-based incentives, up from 18 percent in 2012.

Staying in the Game

Consistent with results from Mercer’s past four annual surveys, in 2013 few large employers—just 6 percent of those with 500 or more employees—believe it is likely that they will terminate their employee health plans within the next five years and send employees to the public health insurance exchanges. But the portion of small employers that say they likely will end their plans within five years jumped from 22 percent in 2012 to 31 percent in 2013 (Fig. 10).

Among other survey findings:

Expanded eligibility under the ACA. In 2015 employers with 50 or more workers will be required to extend coverage to all who work 30 or more hours per week. About a third of all large employers (500 or more employees) will be affected by this rule (32 percent), and among wholesale/retail organizations, which have large part-time populations, nearly half (48 percent) will be affected.

Domestic partner coverage. More than half of all organizations (55 percent) now include same-sex domestic partners as eligible dependents. This varies significantly based on geographic region, from 38 percent of employers in the Midwest to 71 percent in the Northeast.

Spousal surcharges. Sixteen percent of large employers (up from 12 percent in 2012) have special provisions concerning coverage for spouses with other coverage available.

Tobacco-use surcharges. Twenty-three percent of large employers (up from 19 percent in 2012) vary the worker contribution amount based on tobacco-use status or provide other incentives to encourage employees not to use tobacco. Among employers with 20,000 or more workers, 46 percent now use an incentive.

Slight decline in offerings of retiree medical plans. Twenty-two percent of large employers offer an ongoing plan to retirees under age 65, down from 24 percent, and just 17 percent offer a plan to Medicare-eligible employees (unchanged from 2012).

Small Plans Facing Higher Cost Increasesthan Large Plans

While employers with fewer than 50 workers do not have to provide health coverage under the Affordable Care Act (ACA), if they do they are required to comply with the same essential benefit mandates, age-rating changes, and pre-existing condition reforms that plans in the individual market face, reports Health Care Policy and Marketplace Review.

These mandates are translating into significant cost increases for small employers. One Maryland broker with 90 small-group accounts reports his smallest plan cost increase for 2014 was 15 percent, his largest was 69 percent, and most were in the 30 percent to 40 percent range. By comparison, Mercer announced the average employer health care cost increase for 2014 will be 5.2 percent, meaning small groups could have reasonably expected an increase under 10 percent without the ACA, according to this analysis.

The biggest rate increases are generally going to those employers with the youngest groups the most impacted by the new "age compression" rules.

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